What are thematic funds?
Thematic funds are equity mutual fund schemes which invest in some ideas or strategy. These schemes try to identify specific macro-trends in the economy and invest in sectors which can benefit from these macro-trends. Examples of investment themes are consumption, healthcare, banking and financial services, etc.
How do thematic funds work?
- Unlike bottom up stock picking strategy followed by many diversified equity funds, thematic funds have top down investment philosophy.
- The fund managers identify an investment theme and sectors associated with the theme, and then select relevant stocks.
- Unless specifically stated otherwise in the scheme information document, thematic funds are usually market cap agnostic i.e. they invest across market capitalization segments e.g. large cap, midcap, small cap.
- Thematic funds are usually well diversified in terms of stock concentration, but they are considered riskier than diversified equity funds.
- The fund categories thematic and sector funds are often used interchangeably but there are important differences between the two which investors must understand. A sector fund usually invests in one sector e.g. Pharma, FMCG etc., whereas a thematic fund invests in multiple sectors. For example a consumption thematic fund may invest in multiple sectors like banking, automobiles, consumer durables, FMCG, retail etc. As such thematic funds are much more diversified than sector funds.
thematic funds
Healthcare
- Mutual funds schemes with a larger allocation to equity or equity related securities
- Mutual funds schemes with a larger allocation to equity or equity related securities
Consumption
- Suitable for investors with moderate risk appetites
- Less risky than aggressive hybrid funds like Hybrid Equity Funds or Balanced Funds
- The main advantages are low volatility and income
Banking and Financial Services
- Aims to generate Arbitrage profits by exploiting price differences of the same underlying assets in different capital market segments
- Also invest in debt and money market instruments
Who should invest in thematic funds?
- Financial advisors recommend that diversified equity funds should form the core of your equity investment portfolio. You can supplement your core portfolio by investing in thematic funds since some investment themes have the potential to grow faster and outperform in the long term.
- You should understand the theme you are investing in. However, knowledge of individual sectors within a theme may not be required. Though thematic funds are more suitable for experienced investors, even new investors can invest in thematic funds if you understand the theme.
- You should have high risk appetites for thematic funds since particular themes can be more adversely affected in certain market conditions.
- You should have long investment horizons for thematic funds. Investment tenures of at least 5 – 7 years are recommended for thematic funds.
How you should invest in sector funds?
- You can supplement your core portfolio of diversified equity funds with sector funds because sector funds can give high returns depending on your entry and exit.
- Investment planning / asset allocation is very important in sector funds. Financial advisors recommend limiting single sector exposure to a maximum of 10%.
- You need to have sufficient knowledge of a particular sector, if you are investing in sector funds. Accordingly, these funds are not suitable for new or inexperienced investors.
- You need to have very high risk appetites for sector funds.
- Though timing your entry and exit in sector funds can give you high returns, you should also have the flexibility of remaining invested in a sector for longer tenures because some sectors may underperform for fairly long periods due to regulatory or other reasons.